By Tsuyoshi Ito and Sachio Nikaido

27-08-04

Surging crude oil prices, which are threatening to reach $ 50 a barrel for the first time in history, are becoming a destabilizing factor for the Japanese economy. If oil prices continue at an excessively high rate for an extended period, they would seriously hamper the nation's economic recovery.

Futures prices of crude oil on the New York Mercantile Exchange fluctuated wildly, with the September price of West Texas Intermediate, a benchmark of crude oil prices, hitting $ 49.40 at one point.

Surging oil prices have resulted in increased domestic prices of some oil-related products. Gasoline prices have already risen, and there will be an inevitable increase in electricity charges and consumer goods. Domestic major oil refineries are expected to raise wholesale prices of gasoline by 3 yen to 4 yen per litre in September, following a price hike in June. Gas station operators have little margin to absorb an increase in wholesale prices and they will most likely have to pass the increase on to motorists.

The high oil prices will likely also cause utility companies to hike their prices in and after January. This is because the systems used by the firms to adjust fuel and material costs automatically reflect fluctuations in fuel prices and currencies every three months. Tokyo Electric Power and Chubu Electric Power had announced they would significantly lower their charges in October and January, respectively. However, surging oil prices may make the reduction smaller than originally planned.

The rise in crude oil prices also affects corporate earnings. Petrochemical companies have faced a surge in prices of naphtha, or unrefined gasoline, which is a key material. An executive of one of the companies said, "The rise is beyond the range that an individual company can cope with through its own efforts."
Major petrochemical companies have shown a move toward raising prices of vinyl chloride resin, used for water pipes and various other goods, by 15 yen or more per kilogram.

High oil prices have dealt another blow -- a rise in fuel and transportation costs -- to paper manufacturers, which had already been hit by rising prices of pulp and other materials. Four major paper manufacturers -- Nippon Paper Industries, Mitsubishi Paper Mills, Daio Paper and Hokuetsu Paper Mills -- plan to raise prices by 10 % or so for shipments in August and September.

Price hikes for materials do not necessarily result in immediate price increases in end products, because of fierce price competition among companies. However, if the extremely high crude oil prices continue for long, negative effects on households are unavoidable.

Japanese industries have made great strides in saving energy and are far more resistant to a rise in crude oil prices compared with the 1970s oil price shocks. But continued high crude oil prices would inexorably push down the Japanese economy.

An estimate by Daiwa Institute of Research said if crude oil continued to be priced around $ 50 per barrel, it would push down the nation's gross domestic product growth rate by 0.1 %, compared with a figure of around $ 40 a barrel. Tsutomu Toichi, managing director of the Institute of Energy Economics, said, "Oil prices will stay high for the time being, as the demand-supply situation is so tight."

As many oil experts share the view, the government has begun reacting to surging oil prices. The Economy, Trade and Industry Ministry set up a liaison council earlier to research the effects of surging crude oil prices on corporate performance and other economic factors.

The council plans to interview companies and compile the results of its research by the end of August, prior to starting discussion on practical measures to be taken.

Source: The Yomiuri Shimbun